Saturday, January 24, 2009

In a dramatic intervention the Australian government and the big four banks are to set up a multi-billion investment fund able to use government-guaranteed borrowings to directly support property developers unable to roll over foreign loans.

The government will contribute $2 billion and the banks another $2 billion. The fund will be able to use government-guaranteed borrowings to create up $30 billion of loanable capital.

Although the shopping centre developer Centro recently succeeded in rolling over its loans after a foreign lender threatened to pull out, the Prime Minister and Treasurer fear that other developers will not be so fortunate.

"We will not idly by and watch jobs and small and medium size businesses be wiped out by fluctuations in global credit markets," said Mr Rudd and Mr Swan.

Commercial property development employs 150,000 Australians. The government feared that without action as many as 50,000 could lose their jobs.

To be called the Australian Business Investment Partnership, the fund will operate along similar lines to Special Purpose Vehicle for car dealer financiers announced in December. It will advance funds only to developers whose foreign finance has been withdrawn as a result of changes in the policies of overseas lenders...
"It will be structured to minimise the exposure risk to taxpayers. It will not allow the major banks to pass on any under performing assets to the government," said the Prime Minister.

The Property Council of Australia has backed the fund saying it will help ensure the survival of well-run companies that manage the savings of millions of mum and dad investors, superannuation policy holders and retirees.

The government will chair the partnership's 5-person board with Westpac, the Commonwealth Bank, the National Australia Bank and the ANZ Bank each nominating a director. All of the board's decisions about allocating finance will have to be unanimous.

The government will charge a fee for the use of its guarantee and wind up the fund after 2 years. It hopes to have it operating by March.

Overnight in New York Treasurer Wayne Swan told a business gathering that his government's actions to date were "just the beginning" of its response to the crisis.

In an earlier radio interview he said the slowing of Chinese economy alone could wipe out $5 billion off Australian revenue.

"What we are now seeing is the unwinding of the mining boom and all of the consequences that will have for our economy and, of course, for growth more broadly," he told Fairfax radio.

The collapse of growth in Japan and China - Australia's two biggest export destinations - saw economists yesterday further cut their forecasts of Australian growth and ramp up their forecasts of interest rate cuts.

Bothy Citibank and JP Morgan are now expecting the Reserve Bank to cut its cash rate by a further 1.00 percentage points when it next meets on February 3 - bringing the cash rate to all-time low of 3.75 per cent and the standard variable mortgage rate to a 40-year low of 5.75 per cent if fully passed on.

Former Reserve Bank Governor Bernie Fraser said he expected the Bank to eventually cut its cash rate to less than 2 per cent.

"This recession will be deeper and longer than the last recession in 1991," Mr Fraser told Bloomberg news. "People are not about to spend their stimulus, which exactly what needs to happen for confidence to improve."

Australian export prices soared a record 15.9 per cent in the December quarter, in what economists say was a last hurrah assisted by a dive in the Australian dollar.

Commonwealth Securities forecast an imminent 25 cut in the contract price of Australian iron ore.